Causes of Income Inequality in the United States

Causes of Income Inequality in the United States

Income inequality has been growing in the United States for over 30 years. The socioeconomic issue is worrying many Americans, politicians and economists.

The argument as to what is causing the divide and how it can be solved continues to be highly debated. Still, money continues to flow to the top ten percent earners in the country. Anyone that’s stuck making less than $10 an hour is earning an income that’s below the federal poverty level.

The gap between the rich and everyone else is rising in developed countries outside of the US as well, causing turmoil across the globe. While global poverty is declining, the middle- and working-class citizens are struggling to keep up with the cost of living.

The terms “the 1%” and the “99%” are commonly used as Americans express frustration regarding the income gap between the two. Many believe that world policies are designed to favor the 1% over everyone else, and little is being done to resolve income inequality.

Causes of Income Inequality in the United States

Income Inequality Causes

The rich continue to get richer while the middle- and lower classes are barely getting by. As a strong believer in capitalism, I believe just about anyone can become successful and wealthy in the great land of opportunity. However, it’s impossible to ignore the disparity of income levels.

What is happening in the US that’s causing such a discrepancy? There are 3 major causes that researchers have found to be a large part of the rising income inequality in the United States. The availability of cheap outsourced labor (globalization), technology distorting the skills that are in demand, and US government policies.

All three of these explanations are culprits for the increasing gap between the rich and the poor. In this article, I will breakdown each one of these factors and expand on why they’re helping to fuel the income inequality crisis.

Globalization

Globalization is the expansion of goods, information, jobs, and technology around the globe. It has both its positives and negatives. It helps poor countries by increasing their access to products and services. It also helps underdeveloped countries modernize and gain better job opportunities.

On the flipside, globalization can remove job opportunities in developed countries like the United States. This is because US companies can outsource their labor to other countries and pay much less in wages. If all the production moves out of the United States, the job opportunities will go along with it.

A study conducted by the National Bureau of Economic Research found that globalization is directly increasing income inequality in the US.

The study looked closely at the pay of top executives that benefit from globalized commerce. Researchers that took part in the study Wolfgang Keller and William W. Olney (2018) had this to say on their findings: “Overall, these results indicate that globalization has played a more central role in the rapid growth of executive compensation and U.S. inequality than previously thought.”

It’s simple to understand, if you are a business owner, you will cut costs to improve your bottom line, and labor is a big expense. The money saved from outsourcing goods and labor is mainly used to increase the income of top-level executives.

Technology

The ever-increasing role that technology plays in our lives is also playing a large role in income inequality. Over the last 60 years, technology has drastically changed the way of living in the US. The digitalization and augmentation of labor is diminishing job opportunities across the board.

Those with a higher education are more sought after to operate or create the software and technology used in the modern world. Authors Dao, Das, Koczan and Lian (2019) described in the World Economic Outlook by the International Monetary Fund that “In advanced economies, about half of the decline in labor shares can be traced to the impact of technology. The decline was driven by a combination of rapid progress in information and telecommunication technology, and a high share of occupations that could be easily be automated.”

White-collar jobs that were once available for the less educated are disappearing as technology advances. Those that cannot afford a college education are left behind and have an even more difficult time finding lucrative occupations. On top of this, the valuations of US tech companies are breaking records. Apple, Microsoft, Google, and Amazon have all reached a market capitalization of over $1 trillion in 2020.

Income inequality is especially rampant in places like Silicon Valley where many of these major tech corporations reside. A lot of wealth is flowing into tech. Those with the skill set and education that’s necessary for the tech sector are consequently getting paid more.

US Government and Monetary Policies

US government and federal monetary policies are also to blame for widening income inequality. After the Great Recession in 2008, the US Federal Reserve began purchasing assets on a large scale. This monetary policy is known as Quantitative Easing (QE), which has helped to inflate the value of assets.

When assets like stocks and bonds rise, the wealth of the top 10% increases as they own more assets than middle- or lower-class citizens. Federal Reserve author and former employee Pedro Amaral (2017) wrote in his commentary on Monetary Policy and Inequality: “Such asset purchases decrease the interest rates and increase the prices not only of the securities that are bought but also of securities that are substitutable enough, through a portfolio effect.”

Along with their quantitative easing program, the Fed is also devoted to keeping inflation within their desired target by keeping interest rates unnaturally low. This has accelerated the decline in the purchasing power of the US dollar which many middle-class citizens rely on to get by.

Assets like stocks and real estate continue to rise while the buying power of the money used to purchase them continues to plummet. This has made it increasingly harder for those in the middle class to increase their wealth or purchase a home.

Government policymakers in the US have favored corporations over citizens by allowing them to find tax and labor loopholes that don’t apply to the average joe. The mega-corporation Amazon made an income of $11 billion in 2018 but paid $0 in federal taxes. The last time the federal minimum wage was increased was back in 2009, and it only rose from $6.55 to $7.25 per hour.

Final Thoughts

The complexity of income inequality in the United States makes it difficult to put more blame on one cause over others. The problem comes from a wide range of factors but these 3 causes are commonly agreed to have the biggest impact on income inequality in the US.

Globalization helps underdeveloped countries, but it also hurts people in the US that aren’t CEOs of multi-billion-dollar corporations. Business owners will likely continue to focus on the bottom line rather than keeping jobs in the US. The advances in Technology is benefiting our lives in many ways but also damaging them in other ways.

Getting a higher education to keep up with the digital revolution is not within reach for some people. As automation and artificial intelligence progress, simpler occupations won’t need to be performed by a human. If governments and central banks continue to implement policies that decrease wage growth and inflate financial markets, the acceleration in income inequality will go on.

The solutions to this socioeconomic issue are not easy to come by and even harder to implement. However, something will need to change eventually as the wealth gap does not appear to be decreasing in the US anytime soon under current conditions.